Rupiah predicted to weaken to 14,000 per US dollar

JAKARTA. The Institute for Development of Economics and Finance (INDEF) predicted that the country's currency, rupiah, will lose more value in 2016 weakening to 14,000 per U.S. dollar. Currently, rupiah is fluctuating around 13,700 per dollar.

Executive Director of Indef Enny Sri Hartati said balance of payments is one of the factors determining the exchange rate. The trade balance tends to leave surplus but more on falling imports faster than decline in exports. Meanwhile service account and income are almost certain to be negative," Enny said in a seminar here on Thursday.

Enny said the position of the balance of payments will depend on inflows of capital both for direct investment and portfolio.

Performance in foreign direct investment will be determined by the effectiveness of government's policy packages, while portfolio investment will continue to swell boosted by high domestic interest rate, she said.

"However, portfolio investment will remain volatile to follow the trend of expectations , rumors, and developments of interest rates," she said.

She said the main external factor determining the rupiah value in 2016 is the decision of the Fed to raise its fund rate. She said expected improvement of the US economy will lead the Fed into raising its fund rate in 2016 .

The increase in the Fed fund rate would put pressure on rupiah that could result in capital flight from portfolio investment, she said.

In addition, China has not made progress in coping with its economic setback that global commodity demand is feared to remain weak.

Shrinking demand from China, the world's second largest economy, and Indonesia's largest trading partner, would have bad impact on the country's export performance.

"High credit interest rate in Indonesia would contribute to increase in foreign debts, which are relatively low in interest rate. As a result the pressure on rupiah would greater," Enny said.

Meanwhile, imports in 2016 would follow the trend of industrial development and effectiveness of the government's policy packages. If the policy packages are effective, demand for foreign exchanges will remain large.

Indonesia's imports in January-September, 2015 averaged US$107.94 billion and demand for foreign exchange to pay foreign debts and interest of the government and the central bank in January-July, 2016 would reach US$5.08 billion.

Taking into account all the prediction and assumptions, Enny predicted that the rupiah value would fall to the level of 14,000 per dollar.

"It is more pessimistic than the government's prediction of 13,900. However, if the government and Bank Indonesia succeeded in reducing the current account deficit and in increasing the economic growth , there is still a chance for rupiah to stand at the level of below 14,000 per dollar," she said.